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How does Fiscal Policy stimulate LRAS?

How does Fiscal Policy stimulate LRAS?

Reply 1

mikejones

How does Fiscal Policy stimulate LRAS?

Increasing spending on education and training increases the quality of the labour force (worker productivity).
Increasing spending on investment increases the quantity of capital.

Both of those should shift the LRAS curve to the right.

Reply 2

alex_hk90

Increasing spending on education and training increases the quality of the labour force (worker productivity).
Increasing spending on investment increases the quantity of capital.

Both of those should shift the LRAS curve to the right.

arent these more of a supply side policies though?

coz fiscal is only a demand side policy

Reply 3

OP

liverpool

arent these more of a supply side policies though?

coz fiscal is only a demand side policy

Fiscal = Any form of Gov. spending and taxation.

Reply 4

OP

Q: How does Monetary Policy stimulate LRAS?

Dont worry, im not going to ask about supply side policy next :redface:

:redface:

Reply 5

Cuts in Corporation Tax will encourage firms to invest, increasing efficiency and increasing the productive capacity of an economy, shifting LRAS to the right.

Reply 6

No. it isn't.
Abslout definition:
Fiscal policy is the use of government expenditure and taxes to manage the economy. (Used by governments that is obviously).

Thus supply side policies are just as much a part of fiscal policy as demand side policies.
Demand side policies largely involve taxation or decreasing government expenditure. Supply side policies largely involve increasing government expenditure or reducing taxation. Each of those is essentially a half of fiscal policy.

To answer the question, supply side policies to increase the quantity/quality of the factors of production.
E.g.
Land - (unusual) subsidies to farmers to use various technologies/fertilisers to make agricultural land more fertile i suppose.
Labour - retraining/reducation
Enterprise - Tax break areas e.g. canary wharf
Capital - government start up loans for buisnesses perhaps? or government investment in R & D to increase the quality of capital?. Not sure of a good example for this one.

Monetary policy - Erm, stumped on this one to be honest. I'm not sure that it does...

Reply 7

mikejones

Fiscal = Any form of Gov. spending and taxation.

hmm yh and suuplyside policies are the ones that are mainly used to increase productivty and so on.

but i understand now. thanks for that :smile:

:smile:

Reply 8

A fall in the interest rate will increase business confidence and makes the cost of borrowing cheaper so businesses are more likely to invest. This will increase efficiency and the productive capacity of the economy, shifting LRAS to the right.

Reply 9

mikejones

Q: How does Monetary Policy stimulate LRAS?

Dont worry, im not going to ask about supply side policy next :redface:

:redface:

well a decrease in interst rates by the MPC will increase consumption as more borrowing and buying on credit.

also an increase in investment will lead to an increase in productivity as more people will borrow and invest into firms and so on. Thus a reduction in interest will increase AD as more consumption and investment. which will increase LRAS to the right :smile:

:smile:

Reply 10

liverpool

well a decrease in interst rates by the MPC will increase consumption as more borrowing and buying on credit.

I would imagine that this will affect SRAS, and not LRAS. In the short run, businesses will react to an increase in AD by increasing SRAS, but I think LRAS is influence more by investment.

Reply 11

hmjessop

I would imagine that this will affect SRAS, and not LRAS. In the short run, businesses will react to an increase in AD by increasing SRAS, but I think LRAS is influence more by investment.

yup your right :smile:

:smile:

Reply 12

OP

hmjessop

In the short run, businesses will react to an increase in AD by increasing SRAS, but I think LRAS is influence more by investment.

Why would they want to do that? :confused:

:confused:

Reply 13

A shift to the right of AD will lead to an extension in supply; not an 'increase' as you noted.

Reply 14

liverpool

also an increase in investment will lead to an increase in productivity as more people will borrow and invest into firms and so on. Thus a reduction in interest will increase AD as more consumption and investment. which will increase LRAS to the right :smile:

:smile:

I'm sorry...I understand how that would shift the AD curve but how would that effect the AS curve? the increase in investment you mean?

Reply 15

Spike4848

I'm sorry...I understand how that would shift the AD curve but how would that effect the AS curve? the increase in investment you mean?

yup investment will shift the LRAS

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